What is the link between Globalization and Poverty?

In my previous post, I noted that the narrator of the Globalization is Good documentary claimed that there was a strong correlation between how globalized a country is and poverty. Specifically, those countries that are globalized are likely to have less poverty. How does this claim stand up to empirical scrutiny? Well, one answer comes from the National Bureau of Economic Research (NBER) in Cambridge, Massachusetts.

“The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor.”

Does globalization, as its advocates maintain, help spread the wealth? Or, as its critics charge, does globalization hurt the poor? In a new book titled Globalization and Poverty, edited by NBER Research Associate Ann Harrison, 15 economists consider these and other questions. In Globalization and Poverty (NBER Working Paper No. 12347), Harrison summarizes many of the findings in the book. Her central conclusion is that the poor will indeed benefit from globalization if the appropriate complementary policies and institutions are in place.

Harrison first notes that most of the evidence on the links between globalization and poverty is indirect. To be sure, as developing countries have become increasingly integrated into the world trading system over the past 20 years, world poverty rates have steadily fallen. Yet little evidence exists to show a clear-cut cause-and-effect relationship between these two phenomena.

Many of the studies in Globalization and Poverty in fact suggest that globalization has been associated with rising inequality, and that the poor do not always share in the gains from trade. Other themes emerge from the book. One is that the poor in countries with an abundance of unskilled labor do not always gain from trade reform. Another is that the poor are more likely to share in the gains from globalization when workers enjoy maximum mobility, especially from contracting economic sectors into expanding sectors (India and Colombia). Gains likewise arise when poor farmers have access to credit and technical know-how (Zambia), when poor farmers have such social safety nets as income support (Mexico) and when food aid is well targeted (Ethiopia).

The evidence strongly suggests that export growth and incoming foreign investment have reduced poverty everywhere from Mexico to India to Poland. Yet at the same time currency crises can cripple the poor. In Indonesia, poverty rates increased by at least 50 percent after the 1997 currency crisis in that country, and the poor in Mexico have yet to recover from the pummeling of the peso in 1995.

Without doubt, Harrison asserts, globalization produces both winners and losers among the poor. In Mexico, for example, small and medium corn growers saw their incomes halved in the 1990s, while larger corn growers prospered. In other countries, poor workers in exporting sectors or in sectors with foreign investment gained from trade and investment reforms, while poverty rates increased in previously protected areas that were exposed to import competition. Even within a country, a trade reform may hurt rural agricultural producers and benefit rural or urban consumers of those farmers’ products.

The relationship between globalization and poverty is complex, Harrison acknowledges, yet she says that a number of persuasive conclusions may be drawn from the studies in Globalization and Poverty. One conclusion is that the relationship depends not just on trade or financial globalization but on the interaction of globalization with the rest of the economic environment: investments in human capital and infrastructure, promotion of credit and technical assistance to farmers, worthy institutions and governance, and macroeconomic stability, including flexible exchange rates. The existence of such conditions, Harrison writes, is emerging as a critical theme for multilateral institutions like the World Bank.

Where do most of the World’s Poor Live?

In a recently released report. the Center for Global Development argues that there are more poor people in middle-income countries (MICs) than in low-income countries (LICs). The new “bottom billion” (the phrase made famous by economic Paul Collier’s book of the same name) is not only the result of India and China having moved from LIC to MIC status. Indeed, according to the authors of the report, “the proportion of the world’s poor in MICs has still tripled, not only from a range of other countries like Nigeria, Pakistan, Indonesia, but also from some surprising MIC countries such as Sudan, Angola, and Cameroon.” Whereas twenty years ago, more than 90% of the world’s poor lived in LICs, today more than 70% of the world’s poor live in MICs.

Since 2000, over 700 million poor people have “moved” into MICs by way of their countries’ graduating from low-income status (see figure 1). And this is not just about China and India. Even without them, the proportion of the world’s poor in MICs has still tripled, not only from a range of other countries like Nigeria, Pakistan, Indonesia, but also from some surprising MIC countries such as Sudan, Angola, and Cameroon. The total number of LICs has fallen from 63 in 2000 to just 40 in the most recent data (see figure 2), and this trend is likely to continue.3 India and three other countries (Pakistan, Indonesia, and Nigeria) account for much of the total number of the new MIC poor (see figure 3). Among all MICs (new and old), five populous countries are home to 854 million poor people, or two-thirds of the world’s poor. These are Pakistan, India, China, Nigeria, and Indonesia.

One might ask how sensitive the shift is to the thresholds themselves? Of the new MICs, several are very close to the threshold—notably, Lesotho, Nicaragua, Pakistan, Senegal, Vietnam, and Yemen. India is only US$180 per capita per year over the threshold, but it is reasonable to assume that growth in India will continue and keep it out of danger of slipping back. It is important to recognize, however, that a significant number of the new MICs still fall under the threshold for the International Development Association (IDA), the World Bank’s concessionary lending window for poor countries.

The authors argue that this change in the location of the world’s poor carries with it important policy implications. If most of the world’s poor live in MICs, what does that mean for foreign aid and for the economic development policies and goals of rich countries and international organizations alike? Read the report to find their answer. The report, in addition, contains some interesting charts:

The Age of Global (In)equality?

Many of the readings from Chapter 9 of O’Neil’s Essential Readings address the issue of global divergence/convergence in economic growth and/or inequality over the last few decades (and even further back than that–i.e., the Pritchett reading). The question comes down to whether there has been more or less inequality over time. Which is it? Well, the answer depends to a large extent on how one chooses to measure inequality. I’ll begin my response to this by quoting a student’s e-mail I received earlier today:

Hello, below is a link to a video showing one aspect or area of convergence.

I don’t know if I agree that countries are converging in regards to wealth and health; after all, Africa still seems very far behind.  I general, yes, countries today are healthier (longer life spans) and wealthier (not looking at inequality) than they were 200 years ago…

…For our purposes, what is the meaning of convergence and divergence?  From Pritchett, he seems to be measuring growth in terms of GDP and concluding that there is divergence between developed and developing nations (i.e. the levels of growth are not coming together, but separating).  What about China and India, who experienced faster or “larger growth” than some developed nations in the 80’s to mid 90’s?  Then with Milanovic, he is talking about inequality – how it is decreasing at the world level (when Indian and China are included) and this shows convergence.  To me, O’Neil seems to be trying to present two sides of an issue; however, I see two separate issues.  One is divergence in economic growth and the other is convergence in equality. I suppose that China’s and India’s economic growth can explain or at least correlate to lower inequality at the world level, but is that the correct way of interpreting Milanovic?  Is he saying that there’s a convergence of equality (or lower inequality gap worldwide), because countries (when including China and India) are converging in regards to economic growth?

Thank you.

This student is essentially correct in his reading of the respective arguments. As I mentioned earlier, which view one takes on the question of the recent direction of inequality convergence/divergence depends upon how one chooses to measure inequality. To put it differently, it depends upon whether your unit-of-analysis is the country or the individual. A Gini Index score that is calculated on the basis of mean levels of national income (or wealth) may not be the same as one calculated on the basis of comparing the wealth of individuals worldwide. In fact, Milanovic tells us that the values are indeed different, and the difference is due mainly to what has happened in China and India over the last two decades or so.


Dependency Theory and Import Substitution Industrialization (ISI)

PBS broadcast a tremendously informative series called Commanding Heights, which took a look at the the battle over the world’s political economy during the 20th century.  Below you’ll find a portion of the episode on Latin America, which has been uploaded to You Tube.  The clip below explains the concept of dependency theory–the theoretical impetus behind the establishment of the political economic institution of import-substitution-industrialization (ISI).  Unfortunately, ISI did not work very well in practice, and Moises Naim–the editor of Foreign Policy Magazine, explains why in the clip below.

P.S. “The Chicago Boys” were not Michael, Scotty, and Phil. 🙂

The Relationship Between Wealth and Health

The BBC reports on fascinating new research, which concludes that “economic growth does not necessarily translate into improvements in child mortality.” There are two points I wish to make about this: First, it illustrates an important trend in the development literature regarding the correct metric to use to determine, and compare, levels of well-being worldwide. Historically, well-being has been captured by the crude instrument of Gross National Product (GDP) per capita, but the realization that, for many reasons, the measure was too crude to be a satisfactory indicator of well-being development led to the introduction of other measures, the most useful of which is the Human Development Index (HDI) put out by the United Nations Development Program (UNDP). (Why might GDP per capita be a misleading indicator of well-being?)

The second point follows from the first; one’s policy prescriptions vis-a-vis issues of development are to a large extent determined by just which indicator of well-being one believes best captures the essential nature of that elusive concept. As such, IGOs such as the World Bank, have focused attention on overall economic growth, while scholars such as Amartya Sen (who champions the “capabilities approach”) do not view growth tout court as a magical anti-poverty elixir.

From the BBC article:

Ten million children still die every year before their fifth birthday, 99% of them in the developing world, according to Save the Children.

A study comparing economic performance with child mortality reveals that some countries have not translated wealth into improvements across society.

Survival is too often just a “lottery”, said Save the Children’s David Mepham.

He said that even the poorest countries can cut child mortality by following simple policies, but at the moment “a child’s chance of making it to its fifth birthday depends on the country or community it is born into”.

Lagging behind

Angola comes at the bottom of a new “Wealth and Survival” league table drawn up by the UN Development Programme (UNDP).

The figures for child mortality in India are shocking
Shireen Miller
Save the children India

There are few countries in the world where there are such stark wealth contrasts as there are between the wealth of oil-rich coastal strip around the Angolan capital Luanda, and the war-ravaged interior.

UNDP statisticians calculate that more than half of the babies who die in Angola could be saved were the country to spread its wealth more fairly.


Click on the map to be taken to the Johns Hopkins Bloomberg School of Public Health’s Magazine for an article on child mortality.

[Each orange dot is equivalent to 5,000 child deaths.]